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Paul Krugman says Europe’s energy crisis won’t be crippling, but letting prices soar ‘isn’t really an option’

  • Despite Russia’s cuts to gas supplies, Europe should be able to get through the winter, Paul Krugman said.
  • The problem is soaring energy prices, which could make European inflation even worse.

Despite Russia’s cuts to gas supplies, Europe should be able to get through its energy crisis this winter, Noble laureate and top economist Paul Krugman said on Friday.

“The physical scarcity of gas, while real, shouldn’t be crippling … Europe should be able to get through the winter without freezing,” he wrote in a New York Times op-ed, pointing to higher-than-normal energy reserves across the European Union and availability of some alternative energy sources.

Norway has stepped in to replace Russia as Europe’s number one gas supplier, and the EU recently reached its 80% gas storage target two months ahead of schedule.

But the problem is financial and social, Krugman warned. Letting market forces play out is the efficient policy response, but it is also “grotesquely inequitable” as energy producers with low costs earn huge profits while families face financial ruin from energy bills, he said.

“There’s also a macroeconomic risk. Europe still has powerful unions, and some of them will be in a position to demand wage increases to offset a soaring cost of living. The result could be a wage-price spiral that would be costly to unwind. So just letting energy prices rise isn’t really an option,” he explained.

Eurozone inflation is already soaring and hit an annual rate of 9.1% in August. Russia halting gas flows indefinitely on the key Nord Stream 1 pipeline could make it worse. Dutch TTF futures, the European benchmark for natural gas, jumped 28% to 268 euros per megawatt hour. And German baseload year-ahead power, the European benchmark for electricity, surged 23% to 625 euros per megawatt hour.

To control energy prices, the EU has proposed a price cap on gas and electricity rationing. The EU previously agreed to a voluntary 15% gas-usage cut, but electricity demand has only decreased by 2.2% since the start of Russia’s invasion on Ukraine, according to Rystad Energy.

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